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2. EBITDA Multiplier
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. This valuation method uses a multiplier applied to a company’s EBITDA to determine its value. The multiplier is often derived from analysing the sale prices of similar businesses in the same industry and region. This method is useful as it focuses on operational profitability, ignoring variations due to financing decisions, tax strategies, and non-cash expenses.
The multiplier or multiple is a crucial factor in this method, as it represents the perceived risk, growth potential, and other market dynamics.
The table below provides an explanation and an example of the input variable related to the ‘EBITDA Multiplier Valuation’ method:
| Input Variable | Explanation | Example |
| Multiple | The EBITDA multiplier reflects how much a potential buyer is willing to pay for every pound of EBITDA the business generates. It’s often determined by comparing similar transactions in the industry or market sentiment. This multiplier is applied to the company’s EBITDA to derive its valuation. | If companies in a particular industry typically sell for 8 times their EBITDA, then the multiple is 8. So, if a company has an EBITDA of £500,000, its valuation using the EBITDA multiplier would be £4,000,000 (8 x £500,000). |
